A word first on the unemployment rate (groan? no...:-)), which is one of those Soundbite Statistics, like GDP growth, that the conventional wisdom takes for the word of God and most people are impressed by without understanding them.

The unemployment rate is based on the notion of the labour market, the supply side of which is composed of those who offer their labour, whether they currently have a job or are seeking one. This group, employed and job-seekers, make up what's called the labour force. The unemployment rate is the percentage of job-seekers in the labour force. That is, job-seekers divided by (employed plus job-seekers). The rest of the working-age population doesn't enter into the reckoning.

We've kicked the unemployment rate around here quite a bit in the past, and decided it's a fairly dodgy indicator. It can be manipulated (witness the recent case in France of a tussle between the government and the national statistics institute, INSEE, over the improvement in the UR brought about by the national employment agency striking job-seekers off their rolls) or influenced by social support systems that withdraw job-seekers from the labour market (long-term sickness, disability, lone-parent benefits are examples). A better indicator would appear to be the employment-population ratio (or employment rate), that gives the percent of people employed within the working-age population.

To illustrate this - and throw some light on the "discouraged workers" syndrome - let's have Laurent GUERBY's now-famous point about the employment rate and the unemployment rate, now updated (though it goes on being true over the years) :

According to the OECD's Statistical Annex to the Employment Outlook, 2007, Table C, p252, the employment rate (employment/population ratio) and the unemployment rate for men between 25 and 54 years of age in 2006 is given as:

Country	Employment Rate	Unemployment Rate
France	86.7%	7.6%
United Kingdom	87.8%	4.2%
United States	87.3%	3.6%

This is a demographic one would expect to have a high employment rate, and in fact it's quite high in all three countries, with little difference in the rates. But the unemployment rate in the UK and US... is half that of France. How can that be, if the proportion of employed people is similar? A hint lies in another line in the OECD table: the Labour Force Participation Rate (that's the ratio of the labour force to the working-age population) is 91.7% in the UK and only 90.6% in the US, while it's 93.8% in France. Take those 2% difference in the UK and add them to the UR, and you get 6.2%; for the US, it's 3% to add, giving a UR of 6.6%. Suddenly the French unemployment rate doesn't look so out of line...

Those are numbers, but what does this mean in human terms? It means that people with (often long-term) unemployment problems leave the labour force and move into the inactive or "not in labour force" (NILF) population. This may happen as a result of discouragement (the perception that there are no jobs to be had) and/or of the way social benefits are organised - sickness benefits, for example, may be a refuge for the long-term unemployed, as has been conclusively shown is the case in the UK, where, rather than a bug, it has turned out to be a feature, keeping several percentage points off the unemployment rate and allowing New Labour to claim they have given the country a full-employment economy.

The US is definitely one of the countries that, according to the OECD, have a comparatively high rate of sickness/disability benefit recipients of working age. This chart has not been belied since the OECD drew it up two years ago:

click to enlarge

In the US, working-age recipients of Disability Insurance Benefit (Title II) have risen 50% in the last ten years, to reach, in 2006, 6.8 million. At the same time, (in December 2005) 4.3 m disabled adults received means-tested Supplementary Security Income. According to the Social Security Administration, there's an overlap of about a million SSI recipients among DI recipients, so, in the aggregate, I think we're looking at about 10 m working-age recipients of some form of disability benefit. To what extent or in what proportion that number covers hidden long-term unemployment, it's beyond me to say. The 50% increase I mentioned above is, in numbers, 2.3 million. An MIT working paper from Autor and Duggan (2002) studies the rise in disability benefits (uncannily like those in the UK) and suggests they account for "two thirds of a percentage point" missing from the unemployment rate. Studies in the UK suggest that almost half the recipients of Incapacity Benefit could be considered as long-term unemployed who have given up on the labour market. Applying that yardstick here (but can we?) would give us 4 to 5 million. Bradbury in her Boston Fed paper linked to above estimates at from 1.6 to 5 million the numbers that have withdrawn from the labour market. In terms of the unemployment rate, there are from two-thirds to one to three additional percentage points there.

When I say uncannily like those in the the UK I'm thinking that the easing-up of restrictions and the improvement of benefits related to sickness and disability happened under Thatcher and Reagan. If you're moving towards services esp. financial, and doing away with manufacturing because you want it done elsewhere in the world for a lot cheaper, you're clearly going to have a low-skilled labour problem. Don't let it be said you've created unemployment, just dump the problem into the sickness and disability limbo, and claim you've solved the unemployment problem. Not a bug, a feature.

What we've seen shows that the unemployment rate is a statistical construct that is very sensitive to the way the population is divvied up into different groups. Above we saw the unemployment rate go down when people move into the "Not In Labour Force" group. But that group is at least counted as part of the working-age population. There's another group that, though of working age, is not counted as part of that population: the military and institutional population. Employment stats are built on the civilian, non-institutional population. In other words, (roughly speaking), soldiers and prisoners are set aside and do not count in labour statistics. If all countries had a similar proportion of their population in the military or in stir, that would have little effect on comparative statistics. But the relative size of military and prison populations do differ from country to country.

Active troop levels in the US run to around 1.4 million, or 0.48% of total population. According to the US Bureau of Justice Statistics, there were 2.3 million persons held in State or Federal prisons and local jails at the end of 2005 (about 0.77% of total population).

Comparisons with the UK and France are set out below (numbers in thousands):

Category	US	UK	France
Military level	1,400	190	259
Military %	0.48 %	0.31 %	0.43 %
Prison numbers	2,300	75	63
Prison %	0.77 %	0.14 %	0.09 %
Mil + Prison %	1.25 %	0.45 %	0.52 %

These are percentages of the total population. In terms of the working-age population, 15-64 (as standardised by OECD), the percentages are: US 1.94 % - UK 0.7 % - France 0.8 %. There's little difference between Britain and France (the French gendarmerie being military accounts for it), but there's a gap of well over a percentage point with the US.

That generous one-point gap works out at 2 million persons of working age set apart from the labour statistics : predominantly young, low educational qualification, and male.

According to Loïc Wacquant, in a 2006 Berkeley Institute of Governmental Studies paper:

the penal system contributes directly to regulating the lower segments of the labor market <...> the carceral apparatus helps to "fluidify" the low-wage sector and artificially depresses the unemployment rate by forcibly subtracting millions of unskilled men from the labor force. It is estimated that penal confinement shaved two full percentage points off of the U.S. jobless rate during the 1990s. Indeed, according to Bruce Western and Katherine Beckett, when the differential between the incarceration level of the two areas is taken into account, the United States posted an unemployment rate higher than the average for the European Union during eighteen of the twenty years between 1974 and 1994, contrary to the view propagated by the adulators of neoliberalism and critics of "Eurosclerosis."

Wacquant is French, (so that explains it), but Western and Beckett are probably the best-known American specialists of the question. As to my own rough calculations, if all those two million unskilled males had been in the labour force in the unemployed category, the unemployment rate for 2006 would have risen to 6.1 % from 4.6 % (OECD). Of course, many of them might find themselves in the NILF category, and some would get an official job. Whatever their effect on the unemployment rate, they would certainly, by increasing the denominator of the working-age population from which they are currently excluded, bring down the employment rate (employed / working-age population), by as much as a percentage point.

Second part tomorrow: What the jobful get...